I’ve been considering investing in Prosper.com as part of my wealth building cycle. I think it looks like a great way to get a steady income stream at 12-15% profit.
It’s funny, I wasn’t sure what to call the investment. “Long term investment”, “part of my wealth cycle” or as an “FFA investment”. These are all terms from various wealth building books I’ve read. I think I like “FFA” the best. That stands for “Financial Freedom Account”, from “Secrets of the Millionaire Mind by T. Harv Eker. The very simple idea is that in order to get wealthy, you need to put 10% of your income into an account whose only purpose is to grow. All profits from that account go back into the account until it is large enough to support me all by itself.
Mr. Eker’s system, which I really should make some standalone entries about, doesn’t really go into much detail about how to grow that account. On the other hand, Loral Langemeier’s excellent new book, “The Millionaire Maker’s Guide to Wealth Cycle Investing” does an excellent job of explaining some of the strategies available to grow that money.
Reading Ms. Langemeier’s book, I got to thinking about Prosper.com, and how perfectly it seems to fit my needs as a wealth accelerator. It seems like a very straightforward way to make reasonable money, while retaining some degree of liquidity and also receiving monthly payouts.
How it works
Basically, Prosper is an loan buying and selling marketplace. I plan to be a lender in this system, so how it works for me is that I bid on loans. I bid on the specific rate acceptable to me. I don’t have to take the whole loan, I can take a part-share of a loan (or multiple loans), thus reducing my exposure risk. I can see the loan requesters’ credit rating, payment history and debt-to-loan ratio. That way, people with better ratings and ratios get better rates.
For example, I could take $100 each of 10 “A” rating short-term loans, at 11% interest. That’s how I plan to do it, spreading the risk around rather than taking on one lender at a time. Rates are higher for larger sums and for longer loan periods.
Prosper makes the loans themselves and then resells the debt to you. It collects the money and disburses it. That sounds ideal, keeping the paperwork for me at a minimum.
Prosper makes this all much more interesting by adding the idea of “groups” to the mix. People can belong to groups dedicated to various purposes. The groups themselves have ratings, so the lenders can see, for example, how many late payments members of the group have ever made. That way, groups get better rates than individuals, and peer pressure helps make sure people stay on time with their payments. I think that idea is brilliant.
I just got set up for Prosper on Friday. Like PayPal, it involves bank account verification, so I can’t fully participate just yet. I am very mucg looking forward to getting my feet wet on this opportunity. I’ll be sure to share how it is going!
Technorati Tags: prosper, prosper.com, lending, promissory notes, ffa, ekar
4 responses so far ↓
1 Latest Finance News » History » Considering Prosper.com // Oct 15, 2006 at 10:01 pm
[…] Original post by Bruce […]
2 Enough Wealth // Oct 16, 2006 at 3:57 am
Please review the concepts of “there’no such thing as a free lunch” and the trade-off between “risk vs. reward” before investing in Prosper.com
And remember that buying 11 small lots of a single risky investment class does NOT reduce risk, as you are not actually diversifying if you stick within a single asset class/sector. eg. if the economy tanks then ALL Prosper.com borrowers have an increased chance of defaulting.
Also, remember that they’re lots of investors looking over the Prosper.com opportunities, so to “win” a slice of debt you have to underbid the others- ie. you were willing to take the LEAST return for the estimated risk.
You may luck out and have 10x$100 invested at 11% and get it all back with interest. But, based on the current “riskless” rate of around 5%, it’s more likely that you’ll not get paid the full interest due on several of these parcels.
There’s also a risk that you might not get your $100 capital back either. Did you notice the following bits in the Prosper.com FAQs?
“There are no guarantees that your loan will be repaid”
and
“Prosper is not directly insured by the FDIC, but lenders’ deposits are covered up to $100,000 by FDIC pass-through insurance provided by our banking partner, Wells Fargo Bank.”
The bit about NOT being insured by the FDIC is clear. I’ve no idea what FDIC “pass-through” insurance is - it might just mean you’re insured against Wells Fargo losing your money during transit from your account to the borrowers! If you intend to invest in Proper you should know exactly what this means, and get confirmation from Wells Fargo in writing.
The first rule of investing is “if it looks too good to be true, it probably is”. I’m not sure if that’s covered in “Secrets [sic] of the Millionaire Mind” or “Millionaire Maker’s Guide…”
Regards
http://enoughwealth.blogspot.com
3 Bruce // Oct 16, 2006 at 5:37 am
Thanks for the warning. What the title of my post “Considering Prosper” implied, but the body did not go into, is that I’m still in the middle of due diligence on Prosper. I won’t be making any investments at all until that’s complete and to my satisfaction.
I didn’t use the term “diversification” at all, and I disagree with you regarding whether buying multiple lots reduces my risk. What it does is reduce my change of losing everything if my one big loan were to fall through. Statistically, not a reduction, in practice, a big difference.
I appreciate your pointing out the default rate of 5%. I hadn’t yet read that particular number, which does throw off my spreadsheet a bit.
I could do without the snarky comment regarding the books I mentioned, however. Both books are excellent, and both talk about risk at length. Interestingly, one of Mr. Ekar’s book recommendations matches yours for Stanley’s “Millionaire Next Door”. Perhaps you were a bit quick to judge based on a title?
4 EasyChange // Oct 19, 2006 at 1:50 pm
Bruce, I am right there with you. I just got started with prosper and I’ve only started loaning there with 100 bucks on two 50 dollar bids.
I was rather dissappointed however due to the nature of bidding. Unfortunately, I had to get loans at a much lower rate than I would have liked and it too much too long (in my opinion) to monitor the bidding process and do bidding.
This time investment is taking some of the appeal of prosper away from me at this early stage.
As for the pass-through insurance, i believe that refers to the funds in your prosper account before they are loans.
Good luck and once I have some more experience with prosper, I will probably write a small bit on my blog as well.
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